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QUICK SUMMARY OF MORTGAGE LOANS

by Jim Parker,

Exclusive Buyer Agent

You'll need to prove two things to get a mortgage loan to buy a home: (1) You're legally earning enough money to make your monthly mortgage loan payments (i.e., what you can afford), and (2) You're an "acceptable" credit risk (i.e., your FICO score is sufficient) for making future payments. Once you provide proof to a legitimate, licensed mortgage lender, you should then be prequalified.

Try to limit your monthly payments to about 30% of your monthly gross income. You'll hear about front end & back end ratios. Front end ratio = ratio of monthly mortgage payment to gross income (Conventional loans require 28% or less). Back end ratio = monthly mortgage payment plus monthly auto loan, credit card, or other loan payments. (Conventional loans require 36% or less.) If neither ratio can be achieved, you may want to try FHA or VA type loans.

NOTE: Divide the 30% of your monthly gross income by $6 to get a ball park loan amount in $1,000's. For example, $900 monthly payment (30% of $3,000 monthly gross income)/$6 => $150,000 loan (e.g., 900/6 x 1,000). Look for homes below your upper price range. If you find something less expensive that you like, you will be able to save money. It has been my experience that every $10,000 in home price means a noticeable difference in features of a home.

*****CHOOSING A LENDER*****

Before asking your first question, you may want to perform some calculations on your own to determine the monthly amount you plan to pay for a home and see if it fits within your budget. You may simply multiply your Gross Monthly Income by 30% as a guideline for average monthly payment. Use my Payments & Loans Worksheet for a more thorough calculation. However, a simple estimate of monthly mortgage; utilities; and miscellaneous household expenses such as lawn care, furniture, draperies, and monthly home maintenance costs can be thrown together. Don't forget to add the costs to move including any early move out penalties from apartments, moving & truck rental expenses, home inspection, homeowner's insurance, and some other prepaid costs before closing into your total budget.

Better FICO scores may mean a no documentation loan;

if you are a first time homebuyer, there may be special loans;

Think about what is important to you:

Low monthly payment?

Low or "NO" down payment?

Low interest rate?

Become familiar with the different types of mortgage loans available: Conventional (usually requires 10-20% down & less stringent appraisal guidelines); FHA (usually requires only a minimum of 3.5% down but mandatory PMI); or VA (if you qualify, can be a 0% down program up to a certain loan amount).

Check some of these sources:

• The HomeFinder section of the Sunday Atlanta Journal-Constitution for different types of loans and lenders
• You may even wish to ask friends/co-workers who recently closed on a home loan who they might recommend.
• Talk with your Buyer Agent for suggestions or seek reviews of lenders on kudzu, angieslist, etc,.

MORTGAGE CALCULATOR & RESOURCE WEBSITES

Excellent Refinance Mortgage Calculator

Excellent Mortgage Calculator for Home Purchases - Please note: Add 20% to payment for homeowner's insurance, property taxes, and mortgage insurance

You know your personal financial situation better than anyone else. To get a competitive comparison, talk with at least three mortgage companies within a 30 day period without a major reduction in credit scoring and learn about the rates and terms of their loans. Ask about the types of loans that fit your situation. Select one lender that offers solutions to your financing needs before you make an offer. You really don't want to be trying to select a lender at the same time you are making offers on a property. Ask each lender for their "par" rate of interest. (This is the interest rate you would pay without paying discount points. Each discount point will cost $$$ to reduce your rate by about 0.125%. Divide monthly savings into cost of discount point(s) to determine payback period.)

The lender should give you a document (i.e., loan qualification letter) to prove to your agent and the Seller that you are "qualified" to purchase the property.

• "Pre-qualification" is just an estimate that a lender makes based on information you furnish to them, perhaps over a phone call, like income, expenses, and other factors. There are no written papers/documents furnished at this stage of the loan process. Nothing is verified at this time either. Being pre-qualified means that a lender has used a brief conversation to judge that you're a good loan candidate with no guarantee that you will be approved for the loan.

• "Pre-approval" is more thorough. During the pre-approval stage, you complete an application ===Click here to see sample loan application=== that informs the lender about how much you make, how much you currently owe (loans and debt) and how much you've saved. Your credit report and credit score is reviewed. The lender then can provide you with a letter stating that you've been pre-approved for a certain loan type and amount.

The difference between "prequalifying" and "preapproval" could make a major difference in your negotiations process. Generally, Agents and Sellers put more credibility into a pre-approval, since it suggests that the potential buyer has a strong credit position.

After contracting for a property, the lender you make loan application with needs to furnish you a Good Faith Estimate (GFE) which provides total closing costs, monthly payments, and an estimated amount to bring to closing. See the last question in the list below to understand what information the GFE provides.

The term "closing" simply means signing the final loan paperwork with an attorney and transfer of title to you. (i.e., Signing on the dotted line - on lots of forms). This "loan (home purchase) closing" process is where Buyer and Seller finally meet to transfer money, property ownership, and keys.

The closing attorney places all lender, attorney, Buyer and Seller related closing costs onto one two-page form (HUD-1 - see link above). The first page summarizes what the Buyer and Seller will pay or receive. The second page details closing costs, prepaids(homeowner's insurance & property taxes), etc., and the balances are transferred to the appropriate Buyer/Seller columns on the first page. ===Click here to review the HUD-1 Real Estate Settlement Statement that you will see with final numbers in the columns perhaps 24 hours prior to closing or at the loan closing in the attorney's office. IMPORTANT: Compare the numbers that the lender gives you with the Settlement Statement form with your Exclusive Buyer Agent to understand if "all" closing costs are accounted for and within reason for Georgia.===